Understanding Home Health and Hospice Business Valuation: Synergies vs. Addbacks

For home health or hospice owners exploring a potential sale, understanding how buyers determine the value of your business is critical. Synergies and addbacks can often be confused because they both play important roles in the valuation of a business; however, they impact the valuation process in entirely different ways. This blog will shed light on each of these terms and explain how they determine what a given buyer may be willing to pay for your business.

The Valuation Equation

At its core, valuation of home health and hospice companies comes down to a simple formula:

Valuation = Adjusted EBITDA (AEBITDA) x Valuation Multiple (VM)

This formula is relatively simple, but the two variables which make up this formula—AEBITDA and VM—are extremely nuanced and complex.

To better understand the impact of addbacks and synergies on the valuation formula, we’re going to look at the valuation formula from the perspective of the seller, meaning that the AEBITDA will remain essentially constant across all buyers. This nuance will be explored in more detail below.

AEBITDA

EBITDA, or earnings before interest, taxes, depreciation, and amortization, serves as the foundation of a company’s valuation and reflects its ongoing operating profitability. However, it doesn’t account for non-recurring or non-essential business expenses. These expenses are “added back” to EBITDA to determine a company’s Adjusted EBITDA (AEBITDA), which paints a clearer picture of its true profitability. In this way, these “addbacks” impact the AEBITDA side of the valuation equation.

Valuation Multiple

A buyer will apply a valuation multiple to AEBITDA that reflects their level of interest and motivation to acquire a business. This motivation is influenced, among other things, by the synergies a buyer expects to achieve once the business has changed ownership post-close. Synergies occur when the buyer can reduce or eliminate costs that the seller incurs in their operations, typically general and administrative (G&A) expenses.

As buyers keep their synergies close to the vest and do not disclose these “savings” to sellers, from a seller’s perspective, synergies seemingly impact the valuation multiple that a buyer is willing to pay, with highly synergistic buyers generally being able to be more aggressive on valuations and seemingly pay higher multiples than less synergistic or non-synergistic buyers.

Nuance: From the buyer’s perspective, synergies in fact lower operating costs, raising the AEBITDA of a business modeled out under their control. This effectively lowers the multiple they must pay for a business at the same purchase price.

Example

Consider a healthcare-related company for sale with the following financial performance:

Company

• $10 Million in Revenue
• 20% AEBITDA

Now, imagine that three different buyers with varying amounts of synergies each make an offer for $16 million. While buyers can be either synergistic or non-synergistic, not all synergistic buyers look the same and will often have varying levels of synergies with the selling business. To illustrate this point, we can rearrange the valuation equation (Valuation = AEBITDA x VM) to see how these synergies affect the multiple from the seller’s and the buyer’s perspective:

Seller’s Perspective

Valuation = AEBITDA x VM

VM = (Valuation) / (AEBITDA)

VM = ($16,000,000) / ($10,000,000 x 20%) = 8x

At the $16 million valuation, the deal looks like an 8x from the seller’s perspective.

Buyer 1 ($500,000 in synergies)

VM = (Valuation) / (AEBITDA + Synergies)

VM = ($16,000,000) / [($10,000,000 x 20%) + $500,000] = 6.4x

Buyer 2 ($250,000 in Synergies)

VM = (Valuation) / (AEBITDA + Synergies)

VM = ($16,000,000) / [($10,000,000 x 20%) + $250,000] = 7.1x

Buyer 3 (No Synergies)

VM = (Valuation) / (AEBITDA + Synergies)

VM = ($16,000,000) / [($10,000,000 x 20%) + $0] = 8x

From the seller’s perspective, each buyer will be paying an 8x multiple for the business at the $16 million purchase price. However, buyer 1 can realize $500,000 worth of synergies post-close, which lowers operating costs and raises AEBITDA, allowing them to effectively purchase the business for a 6.4x multiple. Buyer 2 can only realize $250,000 in synergies post-close, so from their perspective they will acquire the business for a 7.1x multiple. Finally, buyer 3 has no synergies and therefore, like the seller, sees the valuation multiple as an 8x. In this way, synergies impact the AEBITDA of the selling business from each buyer’s perspective, influencing the valuation multiple they will pay for the business.

Now, imagine that buyer 1 and buyer 2 are both only willing to pay a 6.4x multiple for the business from their (the buyer’s) perspective:

Buyer 1’s offer:

Valuation = [(10,000,000 x 20%) + $500,000] x 6.4 = $16,000,000

Buyer 2’s offer:

Valuation = [(10,000,000 x 20%) + $250,000] x 6.4 = $$14,400,000

BUT NOTE, seller’s perspective of buyer 1’s offer:

VM = ($16,000,000) / (10,000,000 x 20%) = 8x

AND seller’s perspective of buyer 2’s offer:

VM = ($14,400,000) / (10,000,000 x 20%) = 7.2x

So, from the seller’s perspective, it appears that buyer 1 can be more aggressive on their valuation than buyer 2 even though they are each paying the same multiple (from their perspective) for the business. In this way, from the seller’s perspective, synergies seemingly impact the valuation multiple that buyers are willing to pay. Even though both buyers are offering the same multiple from their perspective, buyer 1 has a greater amount of synergies and can therefore be more aggressive on valuation from the seller’s perspective.

Conclusion

Understanding how addbacks and synergies influence valuation is essential for any home health or hospice owner preparing for a sale. While addbacks clarify a company’s true earnings, synergies refer to the efficiencies a buyer can achieve post-acquisition. Recognizing how these two factors interact—and the roles they play—provides key insight into what drives valuation outcomes in home health and hospice mergers and acquisitions (M&A). It’s important to note that buyer synergies are unique to each individual buyer and are not disclosed to the seller. As such, the seller cannot identify and/or adjust their EBITDA based on anticipated buyer synergies. Any resulting impact on valuation from these synergies is seemingly demonstrated as an increase in the buyer’s multiple.

An M&A Guide You Can Trust

Stoneridge Partners is a national healthcare mergers and acquisitions advisory and strategic consulting firm that manages complex transactions for home care, home health, hospice, and behavioral health companies.

We’ve been in business for over 25 years and have assisted owners just like you sell their healthcare-related businesses. We have accumulated a deep network of motivated buyers during our 25 years, and we have years of experience as operators, attorneys, and development professionals. We’ve been in your shoes, and we know the daily challenges you face.

If the thought of a potential sale is of interest to you, let us help you optimize your prospects for a successful transaction and the highest valuation.

So how do you start? Please visit our website at www.stoneridgepartners.com or contact us at 800-218-3944 for a confidential conversation.